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April 6, 2011

Is Greenspan Wrong? Barney Frank Says So

It’s “Point-Counterpoint” in the Opinion section of The Financial Times (FT) for two of the most visible and vocal figures in American finance, Former Fed Chairman Alan Greenspan, and Rep. Barney Frank, D-Mass., who was an author of the Dodd-Frank Act that many Republicans are attempting to eviscerate by starving the Act’s implementers of budget resources.

While many acknowledge that moral hazard remains, since most of the remaining large financial institutions in the U.S., after swooning into each others’ arms during the height of their self-made financial crisis, are indeed, ‘too big to fail,’ Greenspan eschews much of the Dodd-Frank Act. In his FT opinion piece, “Dodd-Frank fails to meet test of our times,” he notes: “The financial system on which Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate. We will almost certainly end up with a number of regulatory inconsistencies whose consequences cannot be readily anticipated. “

But are unanticipated “consequences” a reason not to try to reform finance? Frank, in his FT opinion article, “Greenspan is wrong: we can reform finance,” notes that Greenspan “suggests that we should not even have tried.”

Frank goes on to write that the former Fed Chairman “is wrong on both counts. His rosy view overlooks a monumental crisis that threatened the foundations of the American economy, led to soaring unemployment, a continuing foreclosure crisis and weakened economies in the US and Europe.”

It will take some time before America will know who is correct here. And lawmakers have a responsibility to the American people, many of whom are still suffering the effects of this crisis while many bankers are receiving bonuses that are enormous, once again, and based on basically no-cost borrowing from those same Americans.

Who is correct, Greenspan or Frank? Will Americans be left once again to catch failing financial institutions in the next crisis? Should taxpayers see a share of the collective billions that bankers have been paid in bonuses for last three years?

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